This document summarizes South Africa's economic challenges and investment opportunities. It discusses South Africa's low growth environment, rising debt levels, and declining manufacturing sector. Weak business confidence and consumer spending have led to downgrades in corporate earnings. However, some companies like Naspers and Steinhoff are seen as investment opportunities due to undervaluation. Banks and resources companies with strong cash flows are also highlighted. Overall the document analyzes factors constraining South Africa's economy and potential areas for investment gains.

1. Avoiding SA’s
low growth
stranglehold
Sean Ashton
July 2017

4. ANCHOR BCI EQUITY FUND (ZAR)
LAUNCHED APRIL 2013

5. ANCHOR BCI EQUITY FUND (ZAR)
LAUNCHED APRIL 2013

6. EXPANDING DEBT & HOUSE PRICES A BIG PART
OF THE STORY IN SA DURING THE “GOOD YEARS”

7. CHINESE STIMULUS WAS INSTRUMENTAL
IN SUSTAINING GROWTH DURING GFC

8. “BIG GOVERNMENT”
IS BAD FOR GROWTH

9. THE DISAPPEARING
MANUFACTURING SECTOR

10. THE TAX BURDEN AS A SHARE OF ACTIVITY IS
RISING, MOSTLY FALLING ON INDIVIDUALS

11. SA’S NARROW TAX BASE
CAN WE AFFORD TO FURTHER
SQUEEZE THE 1%?

12. Source: IMF

13. THE STATE OF OUR ENTERPRISES
IN 10 YEARS:
• Less electricity sold
• At 4.3x the price
• With 50% more employees
• With R280bn more debt
ESKOM PERFORMANCE
2007 2016
TOTAL INSTALLED CAPACITY (MW) 42 618 45 075
ELECTRICITY SALES (GWh) 218 120 214 487
REVENUE (R MILLIONS) 40 068 163 395
AVERAGE SELLING PRICE (C/kWh) 18 78
COAL PURCHASES (Mt) 117.4 118
COAL COSTS (R MILLIONS) +/- 10 000 47 978
EMPLOYEE COSTS (R MILLIONS) 9 451 29 257
EMPLOYEE NUMBERS 32 674 47 978
DEBT SECURITIES & BORROWINGS (R MILLIONS) 40 455 322 658
Source: Eskom Annual Reports

14. KEY TAKE-AWAYS
• Consumer confidence is shattered –
economy in a holding pattern until
December ANC conference
• Rising tax burden is falling
disproportionately on consumers
• Housing market is key to growth =
confidence!!
• The Zuma “faction” has effectively
removed liquidity from the country –
plugging the gap from taxes will be
tricky!

15. THE BULL CASE FOR
SOUTH AFRICA!

16. KEY ASSET ALLOCATIONS
DECISIONS

17. DEARTH OF MARKET RETURNS
MATCHED BY EARNINGS
0
5
10
15
20
25
30
0
100
200
300
400
500
600
700
800
Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16
Trailing 12M Earnings per Share Price Earnings Ratio
SWIX P/E VS TRAILING EPS
65
75
85
95
105
115
125
JSE SWIX SWIX USD MSCI World MSCI EM
SWIX USD vs MSCI World / EM

18. A SEASON OF EARNINGS
DOWNGRADES FOR SA INC
22.2
22.4
22.6
22.8
23
23.2
23.4
23.6
340
350
360
370
380
390
400
410
420
430
440
Jan-17
Jan-17
Jan-17
Jan-17
Jan-17
Feb-17
Feb-17
Feb-17
Feb-17
Mar-17
Mar-17
Mar-17
Mar-17
Apr-17
Apr-17
Apr-17
Apr-17
May-17
May-17
May-17
May-17
May-17
Jun-17
Jun-17
Tiger Brands
Price BEst Standard EPS, Adj+ 2017* A
10.8
10.9
11
11.1
11.2
11.3
11.4
11.5
11.6
11.7
0
20
40
60
80
100
120
140
160
180
200
Jan-17
Jan-17
Jan-17
Jan-17
Jan-17
Feb-17
Feb-17
Feb-17
Feb-17
Mar-17
Mar-17
Mar-17
Mar-17
Apr-17
Apr-17
Apr-17
Apr-17
May-17
May-17
May-17
May-17
May-17
Jun-17
Jun-17
Bidvest
Price BEst Standard EPS, Adj+ 2017* A

19. EXPECTED EQUITY RETURNS
We would have to downgrade
these numbers if 2018 GDP growth
doesn’t lift to at least 2%

20. WE RETAIN A “RAND HEDGE” BIAS,
BUT DON’T DISMISS THE OTHER SCENARIO…
SWIX ANCHOR BCI EQUITY
SWIX W T NON-RAND / RAND HEDGE ANCHOR BCI EQUITY WT RAND HEDGE
BASIC MATERIALS 14.2% 11.2% 9.5% 9.5%
CONSUMER GOODS 12.1% 8.2% 11.9% 8.3%
CONSUMER SERVICES 30.1% 22.1% 21.2% 16.3%
FINANCIALS 27.1% 4.4% 26.8% 8.7%
HEALTH CARE 4.4% 2.3% 6.2% 4.7%
INDUSTRIALS 5.9% 0.7% 0.7% 0%
TECHNOLOGY 0.5% 0.2% 0.5% 0%
TELECOMMUNICATIONS 5.7% 3.3% 3.8% 3%
DIRECT OFF SHORE 0.0% N/A 18.6% 18.6%
100% 52.4% 100% 68.9%

21. BANKS A HIGH BETA PLAY
ON SA IMPROVEMENT
• Mid single digit EPS
growth
• Strong capital positioning
– dividend safety
• Most defensive SA Inc
exposure
• Portfolio hedge against
positive tail risk

22. NASPERS: POISED TO OUTPERFORM
TENCENT FOR A CHANGE?
Value
Per share
Pay TV 79
eCommerce: B2C 89
eCommerce: Classifieds 188
Tencent 3 530
Mail.Ru 51
Other ** (33)
Total sum of the parts 3 905
Current share price 2 712
Discount -31%
Large discount to intrinsic value driven by
heavy losses incurred at eCommerce units…
-192
-78
35
160
324
-80%
-60%
-40%
-20%
0%
20%
40%
-300
-200
-100
0
100
200
300
400
FY16 FY17 FY18e FY19e FY20e
OLX profitability + forecast
EBIT ($'m) % margin
…while key units are showing evidence of
passing through the J-curve

23. STEINHOFF: BEST LARGE CAP
VALUE ON JSE
• Poor trend of return on capital
(ROCE) in recent years – allied to
large M&A + equity raises
• This is known and part of the
consensus narrative
• Consolidation of platforms, rising
margins, less M&A = better ROCE
in coming years
• Cyclical upturn in France
(Conforama’s largest market)
€ -
€ 2 000
€ 4 000
€ 6 000
€ 8 000
€ 10 000
€ 12 000
€ 14 000
€ 16 000
€ 18 000
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e
Shareholders' equity (RHS) Fwd estimated P/E Steinhoff ROCE (%)

24. RETAILERS RETURNS UNDER
PRESSURE
0
5
10
15
20
25
15
20
25
30
35
40
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Return on Common Equity (LHS) Price Earnings Ratio (RHS)
0%
5%
10%
15%
20%
25%
30%
35%
40%
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17
Goodwill % of equity Operating margin
Return on equity
De-rating a function of declining
returns on capital…
…in turn driven by lower
margins & poor M&A
David
Jones
acquisition

25. RETAILERS RETURNS UNDER
PRESSURE
Forward earnings expectations
for retailers continuing to fall…
350
370
390
410
430
450
470
490
510
530
550
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
BEst EPS (Blended 12 Months)
-10
-5
0
5
10
15
20
25
Aug-06
Jan-07
Jun-07
Nov-07
Apr-08
Sep-08
Feb-09
Jul-09
Dec-09
May-10
Oct-10
Mar-11
Aug-11
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
May-15
Oct-15
Mar-16
Aug-16
Jan-17
…amid a sharp deterioration in
apparel retail sales growth (YOY
% ch)

26. RESOURCES: HARD LANDING
IN CHINA PRICED IN
0.00
5.00
10.00
15.00
20.00
25.00
30.00
Spot P/E
ASR ARI EXX AGL KIO S32 GLN BIL

27. RESOURCES: FOLLOW THE
MONEY…
3%
11% 11%
14% 14%
16%
18% 18%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Spot FCF Yield
0%
10%
20%
30%
40%
50%
60%
Diversified miners spot EBIT Margin

28. PLATINUM: TECHNOLOGICAL
RISK + CASH BURN
-6%
-1%
-2%
-2%
1%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
Lonmin RBPlats Implats Northam
Platinum
Amplats
Platinum Spot operating Margin
-50%
-19%
-16%
-5%
-2%
-60%
-50%
-40%
-30%
-20%
-10%
0%
Lonmin RBPlats Implats Northam
Platinum
Amplats
Spot FCF Yield

29. PLATINUM: TECHNOLOGICAL
RISK + CASH BURN
Automotive engine mix projections (source: UBS)

30. POSITIONING SUMMARISED
• Maintain heavy position in Naspers – J-curve of e-
commerce could drive a reduction of discount
• Steinhoff overweight – returns on capital likely to improve
• Diversified miners over platinum – FCF argument
• Too early for retail – but watch this space closely
• Banks are the “upside hedge” – full weight

31. CONTACT US

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